The Irish company said legal proceedings have been initiated in the High Court of Ireland by director Paul Connolly, who claims the payment to O'Reilly, which was approved by the board on April19, "required the prior approval of shareholders and was consequently unlawful."

O'Reilly is also stepping down as chairman of APN, publisher of the New Zealand Herald. INM said it had received legal advice that the payment, made under what it called "the Compromise Agreement" didn't need shareholder approval.

"The company will vigorously defend these proceedings," it said.

O'Reilly quit as CEO of INM, Ireland's biggest newspaper company, after reaching a compromise agreement with the board amid pressure from dissident shareholder Denis O'Brien, who owns a 22 per cent stake.

INM chief operating officer Vincent Crowley replaces O'Reilly, the company said in a statement.

O'Reilly said at the time that it had "become clear that recent and public shareholder tensions were proving an unnecessary distraction for both me and the company, and this was not in the best interests of the company."

"The board and I agreed that what the company needs now is a board, management team and shareholder base that is purposefully unified and aligned for the company's immediate challenges and for the many opportunities that exist."

O'Reilly took over the reins in 2009 from his father, Tony O'Reilly, as part of a peace deal with O'Brien who had been a vocal critic of the company's strategy.

The stake of the O'Reilly family, who first acquired the Irish Independent in 1973, was watered down to 13 per cent from almost 30 per cent after INM was forced to restructure after cutting a deal with bondholders to forgive almost a billion euros of debt.